Where to go from here?

11 September 2017

Andrew Bell, CEO of Witan Investment Trust, discusses how to make sense of the current global outlook.

Over the past year the world has put on an impressive display of sang-froid in the face of some extraordinary political developments. Although the ultimate real world consequences of the Brexit vote and the Trump incumbency at the White House are not yet apparent, real facts tend to outshine fake slogans most of the time.

Global growth is spreading

The facts show that global growth has become more widely spread in 2017, without yet having accelerated from the relatively muted pace that has characterised the recovery from the financial crisis in 2009. Europe and Japan are expected to deliver better growth than expected six months ago and despite the Brexit uncertainties and the squeeze on consumer incomes, the same applies to the UK.

Although the consensus expects relatively unexciting growth of 1-2% from all three next year there is a degree of consistency in the forecasts which (together with relative stability in US growth at the 2%+ level and a cyclical upswing in many emerging markets) gives some fundamental reinforcement to the double-digit rises seen in many equity markets this year.

A dilemma for investors

The contrast between fairly benign economic news and historically high equity valuations presents investors with a dilemma. They want to make a return on their money at a time when traditional parking places for cash (such as bonds and bank deposits) offer at best low returns.

However, equity markets offer a range of risks (many companies are seeing their businesses disrupted by technological change and valuations offer limited protection against tactical disappointments) and relatively few windfalls from a “dartboard” approach to investing.

Since guessing the direction of indices is both binary and difficult this is an environment which should play to the ability of active managers who can be selective in their approach (and who are having a better time in 2017 than last year). We see our managers as combining the professions of chef and entomologist so that we have the ability to see the fly without dismissing the merits of the soup.

The role of central banks

The mood music from the world’s central banks appears better suited to the slow dances and uncertain steps that mark the end of the party than earlier revelry, with monetary policy either being tightened or no longer acting as a propulsive force for markets.

Nonetheless, the relatively subdued behaviour of inflation, even in economies closer to full capacity, is permitting a patient approach from those with their hands on the interest rate levers so rises in base rates so far range between gradual and invisible.

The slowdown and potential reversal of quantitative easing measures represents a greater uncertainty. The policy itself is unprecedented so the effects of reduced bond purchases or even net sales by the central banks are hard to model, particularly when government bond yields are so low.

The central banks are adopting a cautious approach to tightening but when the brakes are applied there is an increased risk of collision with the windscreen, so seatbelts and airbags should be kept in good order.

Responding with conviction

Faced with this constellation of factors, Witan has remained fully invested, adding to our European and emerging market exposure earlier this year and with a global portfolio that is substantially different from our composite benchmark, reflecting our managers’ concentration on stocks that they hope will outperform rather than simply piggybacking the index.

We have also taken advantage of low borrowing costs by adding to our borrowings during the summer at a fixed rate of 2.74% for the next 37 years – we would be disappointed if equity returns fail to beat such a low hurdle in the medium to long term, even if (as is always the case with equities) patience is required at times.

Please remember that past performance is not a guide to future performance. Witan Investment Trust is an equity investment. The value of an investment and the income from it can fall as well as rise as a result of currency and market fluctuations and you may not get back the amount originally invested.

This material is issued and approved by Witan Investment Services Limited (authorised and regulated by the Financial Conduct Authority) for informational purposes only and does not constitute a solicitation or a personal recommendation in any jurisdiction. Opinions expressed are current opinions as of the date of appearing in this material. No reliance may be placed for any purpose on the information and opinions contained in this document or their accuracy or completeness.